Adam Smith, in his lesser known book "The Theory of Moral Sentiments," used China as an example for the difficulty of truly experiencing empathy over large distances.

"Let us suppose" he wrote "that the great empire of China ... was suddenly swallowed up by an earthquake, and let us consider how a man of humanity in Europe ... would be affected upon receiving intelligence of this dreadful calamity."

Smith depicts in great detail how shaken this representative European would be by the news, but concludes that "...when all these humane sentiments had been once fairly expressed, he would pursue his business ... ."

China was not swallowed by an earthquake earlier this week, but its stock-market shudder sent shock waves rippling across the global economy.

In our closely connected financial world, it appears now that even the slightest sneeze from China's economic juggernaut may very well make advanced industrialized markets catch a mild cold.

Much ink has been spent on explaining why the tumble of Chinese shares led to an apparent overreaction in the United States. After all, Shanghai's exchange is known for its volatility. Domestic investors searching for reasons to realize recent gains did not have to look far. On the very same day, an announcement by Freddie Mac heightened already serious concerns about subprime loans, and the Commerce Department reported that orders for durable goods had fallen by 7.8 percent. Both developments are connected to the still-soft housing market. On top of that, news trickled in of former Fed Chairman Alan Greenspan mentioning the possibility of a U.S. recession for the latter part of 2007.

There is, however, a free enterprise lesson to this event. Many observers trace the initial 9 percent fall in stock prices in Shanghai to rumors that the Chinese government wants to slow down equity markets.

Beijing may look to tighten the availability of credit further than it already has or even implement a capital gains tax (plans of which it quickly denied). Not coincidentally, the "National People's Congress" will convene next week. China's government has a very visible hand in the national stock market. A significant number of the companies listed there are state-owned. Consequently, policy decrees have an immediate and significant effect. That makes this a stock market in name only, adds another layer of uncertainty - political rather than economic - and potentially prevents the freewheeling efficiency of other exchanges in the world.

To be clear, the Chinese government has a very real interest in keeping its stock market relatively stable. Not surprisingly, just a day after the crisis, stocks there rebounded. This was, in part, triggered by the announcement that China would ease restrictive foreign investment regulations somewhat. Evidence of government intervention of this type, however, is likely to keep investors wary.

Optimally, China will at some point make a long-term commitment to allow prices to be determined by markets rather than technocrats. This would increase transparency and boost efficiency. Perhaps then Adam Smith's characterization of China in his most famous treatise "The Wealth of Nations" will again ring true. In 1776 he wrote "China has been long one of the richest, that is, one of the most fertile, best cultivated, most industrious and most populous countries in the world."

Dr. Michael Reksulak teaches economics and public finance in Georgia Southern University's College of Business Administration. He may be reached by e-mail at mreksula@georgiasouthern.edu.